Project Selection Decision Making Linked to a Dynamic Environment

Abstract

A simulation model that attempts to include simplified market and production characteristics of a hypothetical firm and a specific project selection decision mechanism is constructed. Three types of projects are assumed to exist—projects whose impact is to increase market share, decrease production cost and increase production capacity. An experiment aimed at two questions is conducted. The questions are (1) Do different market conditions affect project selection decisions and (2) over time, what patterns of project selection emerge. In the model and experiment, an attempt is made to capture the essence of Abernathy and Utterback's model of the innovation process so that it may be applied to more specific settings. Observed project selection patterns over time indicate an apparent relationship between market share increasing and production cost decreasing projects and Abernathy and Utterback's concept of product innovation, and similarly between capacity increasing projects and process innovation. The model can be viewed as an attempt at developing a linkage between the environment of a firm and an “iterative decision mechanism” as proposed by Baker and Sweeney.